ABSTRACT
International trade has grown rapidly along with the progress of globalization. Heterogeneous and multi-national firms have become very important players in international trade. This chapter focuses on the international trade theory of multi-national firm behavior, according to which a multi-national firm acts to achieve profit maximization of the total production process and internally controls any risk occurring in its supply chain. The risk could originate from the firm's vertically integrated processes that are, production, processing, and marketing/sales of various and relative goods. The chapter proposes a general equilibrium model in order to understand the mechanism of decision behavior of heterogeneous firms on production allocation. It also proposes a general equilibrium model that integrates the comparative advantage theory and new economic geography theory, which have been widely applied to diverse fields, such as international trade and macroeconomics. In the Helpman et al. model, the authors focused on the different productivity as well as the different fixed cost of the heterogeneous firms.
